(Bloomberg) -- Johnson & Johnson begins a two-week trial on Feb. 18 over its plan to end tens of thousands of lawsuits filed by women or their family members who claim its baby powder gave them cancer. The trial, in federal court in Houston, marks the third time the health-care company has chosen to put a relatively small unit into Chapter 11, angling to use the power of bankruptcy to drive a settlement of the suits.
Courts in New Jersey and Philadelphia stopped earlier attempts by J&J — one of the most profitable companies in the world — to tap bankruptcy. Now the company is betting that a Texas judge, along with women who support the proposed $9 billion settlement, will sign off on it.
Beyond a decisive impact on the plaintiffs’ lives and J&J’s fortunes, the outcome may end up at the Supreme Court if appealed, which could change how corporations use bankruptcy to end mass litigation over their products.
Why is J&J being sued?
More than 60,000 people have sued J&J, claiming they were harmed by the company’s talc-based baby powder and similar products. Another 25,000 have made claims against J&J but not filed suit.
The complaints allege that regular use of talc-based powder can cause ovarian and other gynecological cancers. Plaintiffs claim that the talc was contaminated with the cancer-causing substance asbestos. J&J has denied the allegations, and says it has mostly defeated claims against its products in courts around the country.
One notable exception, a trial in St. Louis, ended with a verdict forcing the company to pay more than $2 billion to a group of about 20 women after the US Supreme Court declined to throw out the jury’s decision.
J&J maintains that its products are safe but stopped selling talc-based baby powder in the US in 2020. The company blamed “misinformation around the safety of the product and a constant barrage of litigation advertising” that reduced demand.
What is J&J trying to accomplish with this bankruptcy filing?
The company wants to use special rules available only in bankruptcy court that pause all lawsuits. If the settlement is approved, J&J would establish a $9 billion trust. Instead of asking a jury to compensate them, claimants would receive a payment from the trust based on a set of detailed criteria. Such a system has been used by the Boy Scouts of America and other organizations that have filed for bankruptcy protection to resolve allegations of sexual abuse or corporate wrongdoing.
J&J negotiated the settlement with law firms representing most claimants. Last year, most voted to back the trust proposal, boosting the company’s chances of winning approval from the bankruptcy judge overseeing the case in Houston.
Lawyers for a group of holdouts allege the vote was flawed and claim J&J doesn’t have enough support to set up the trust. The unit of the US Justice Department that oversees bankruptcy also opposes J&J’s plan.
How is J&J using bankruptcy?
To get access to bankruptcy court despite its robust profits, J&J created a special unit, Red River Talc, and made it responsible for paying the talc claims. Red River then filed for bankruptcy in Houston last year.
This is the third time J&J has tried this tactic. Two previous bankruptcies filed in New Jersey, where the company is based, were thrown out after courts ruled that J&J wasn’t in financial distress and therefore wasn’t eligible for the special bankruptcy rules.
If the company succeeds this time, all lawsuits alleging that baby powder caused ovarian and other gynecological cancers would be halted and sent to the trust. A few hundred cases involving mesothelioma, a cancer caused by asbestos, would be allowed to continue in regular court.
The company is allowed to keep trying because every bankruptcy case is judged on its own merits, even if it is overwhelmingly similar to its predecessors. Creditors — and the US Trustee, the federal bankruptcy watchdog — must challenge any new filing if they oppose it. J&J lost twice after the US Court of Appeals in Philadelphia said bankruptcy is reserved for companies facing serious financial trouble.
Why did J&J’s unit file in Houston?
To get around the “financial distress” test, J&J’s unit started a new round of negotiations with the lawyers, and eventually most of the major law firms in the litigation agreed to back a third bankruptcy. The company filed in Houston to avoid the appeals court in Philadelphia, J&J’s lead bankruptcy lawyer said in court last year. If the third case is appealed, it would go before the US Court of Appeals in New Orleans, which has issued decisions more in line with J&J’s legal arguments.
Isn’t this a little like Purdue Pharma’s bankruptcy?
Purdue Pharma filed for bankruptcy protection because it faced billions of dollars in claims that its painkillers contributed to a nationwide epidemic of opioid addiction. Like J&J, it negotiated a deal with a majority of claimants to set up a trust, funded with about $6 billion from Purdue’s owners.
The US Trustee fought Purdue’s settlement all the way to the Supreme Court, which rejected the deal last June. The court ruled that the bankruptcy case was flawed because it stripped the holdouts of their right to sue Purdue’s owners.
Purdue’s owners, like J&J, hadn’t filed for bankruptcy themselves and therefore couldn’t benefit from the special rules that can force an end to lawsuits, the Supreme Court ruled. But in rejecting Purdue’s case, the court left open a potential path for J&J established by Congress decades ago. Owners whose product caused asbestos-related cancers may be able to benefit from bankruptcy.
How would a J&J victory change the legal landscape?
A win for J&J here would create conflicting decisions about one of the main legal disputes in the bankruptcy: Can a profitable company shed debt and get other benefits from the bankruptcy of its subsidiary?
The appeals court in Philadelphia said no. But should J&J win support from the bankruptcy court in Houston and then the appeals court in New Orleans, the fight could wind up back at the Supreme Court. A new decision from the high court could profoundly influence how the nation’s biggest corporations use bankruptcy.
The case is Red River Talc, 24-90505, US Bankruptcy Court, Southern District of Texas (Houston).
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